Thursday, December 04, 2008

Action in Queen's speech on Repossessions

The Labour government has secured agreement from eight banks who control 70% of the mortgage market (HSBC, Abbey, Nationwide, Lloyds TSB, Barclays, Northern Rock, Royal Bank of Scotland and HBOS) to allow homeowners who are struggling to either take a two year mortgage holiday, with the interest added to the loan, or more likely to make reduced payments, with the balance added to the loan.

Why is this a good thing? First of all, it's cheaper for the householder to take a payment holiday (even if they will end up paying interest on the deferred interest) than to go through the whole nasty palavar of repossession through the courts. Plus they get to stay in their own homes. From the government's point of view, this means that they don't have to suddenly house people who are homeless (and fork out housing benefit for them). From a macro-economic point of view, it slows house price falls. House prices fall mainly due to forced selling (otherwise householders simply stay put rather than sell). This also gets rid of some of the fear factor (the main reason people arn't spending is that they are worried sick about losing their jobs and homes). And from the lenders' point of view, this makes long-term sense - their biggest profits come from people who pay their mortgage over the entire term. Having to repossess, sell-off and write down bad loans is a hit on profits that they only undertake to please the short-termists in the markets - but now the govt is a major shareholder, the long-term can be considered. If this actually gets the economy moving again, the banks will be the first to benefit.

Today also saw the French unveil a €26bn stimulus plan. Unlike the UK which went for tax cuts, they have gone for public spending via the state owned companies like EDF, and building social/affordable housing.

So we are now seeing several different stimulus models. The Americans went for a straight income tax rebate in the summer (this is generally believed to have failed as a stimulus), and Obama intends to undertake a mammoth $700bn public spending spree when he takes office on Jan 20th, spending the money on infrastructure (which the USA desperately needs as they've let things atrophy in the last 30 years). The public spending should work (but we will have to wait till the New Year to see if it does). The French are also going down the public spending route (though you could argue that their infrastructure is in good shape already). The British have gone for support for business - the 2.5% VAT cut plus another £7bn help for small business (eg spreading tax payment for struggling firms) - plus help for householders (spreading mortgage payments for struggling homeowners). The Chinese are going to spend $586bn on infrastructure (though they have spent plenty on infrastructure already, arguably too much - they might have been better off providing a social safety net, as the lack of domestic spending in China is due to a lack of welfare support). The Germans have decided to Do Nothing, though bizarrely they are hoping everyone else is acting - Michael Glos, the economics minister, said last week: “We can only hope that the measures taken by other countries ... will help our export economy.” Free-riders!

Everyone has also cut interest rates sharply. So now the fiscal and monetary authorities have done their stuff, and we wait to see whose remedies work best. Of course I'm biased, but I think our remedy is the best. Business activity is key - they pay tax and they employ people. If they survive everyone else does too.


Anonymous said...

I would strongly recommend that you wait to see the small print,as with everything Brown does,the reality and rhetoric are two entirerly differnt things.

CROWN said...

I like the mortgage package announced. My only concern is that the big 8 lenders do not seem to be on board with this yet. It has the look of some hastily announced political measure rather than the much needed help for the homeoweners. Let's hope that the government can persuade the lenders to do this now that it is announced!

Anonymous said...

A problem of this scheme is that it may reduce bank lending further.

If a bank makes a repo it cleanses it's books of a bad debt and enables the bank to make a new loan against its assets.

Also it is unclear whether the banks can charge a penal rate of interest during the holiday - if house prices fall or stay flat the owner may end up owing even more at the end of 2 years.

This may be good idea for people who might be of work for 3-6 months but I doubt the banks would repo them anyway.

snowflake5 said...

Big Jock Knew - when a bank has to repossess, they usually have to write off the debt especially if they are selling in a falling market (as the chances of the borrower paying the difference between the sale price and the amount borrowed is slim if they are jobless, and homeless and having to fork out rent somewhere on top of their loan repayment).

Strictly speaking the banks are lending for 25 years, not 2 or 3, and they make the biggest profits of people stay put and pay off their loans over the entire term.